What could the US Presidential race mean for investors?

A US presidential victory for Joe Biden may thaw relations between the US and China only slightly and could spell a more challenging period for share markets.

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  1. Rob Morgan

Democratic candidate Joe Biden has a commanding lead in polls ahead of the US presidential election in November, but the consensus of opinion suggests a closely contested Presidential race. Biden and Trump are poles apart on several issues, so the result will likely have a considerable bearing on the US economy and international relations – and potentially on stock market returns.

What does history tell us?

US equities have typically fallen when the incumbent lost and rallied when the incumbent won, irrespective of whether the candidate was a Republican or Democrat, showing that investors value continuity. Markets have typically fallen a lot more when a sitting Republican lost to a Democrat, so history suggests that should Trump lose in November markets are more likely to sell off than rally.

A sell-off does not mean that investors will be worse off longer term, though, as investors have, on average, seen higher stock market returns during Democrat presidencies compared to Republicans.

What effect might a Democrat Presidency have?

A Trump win would mean no changes to tax in the near term, which might please markets, but it could see his hard-line approach to China and protectionist measures against Europe intensify.

A Biden Presidency would offer a very different policy approach and style of governing to the Trump administration. The Democrats would want to put through substantial tax rises on businesses and the wealthy, and some investors are worried about the negative impact this might have on share markets. Material changes to policy should certainly be expected if the Democrats take control of both houses of Congress, the House of Representatives and the Senate. 

Trump lowered corporation tax from 35% to 21% in 2017, which created a corporate profits boost that ignited the stock market, but Biden has made it clear he plans to increase tax rate back up to 28%. That’s not certain to happen, but the threat of higher US corporate taxes and tougher rules for business could dampen investor enthusiasm for US stocks and possibly shift focus towards to the rest of the world.

International relations may improve under Biden, particularly towards Europe, but antagonism towards China may not alter much as the Democrats hold unfavourable views towards its stance on issues such as civil rights. However, Biden’s actions could be more predictable, so there may be less likelihood of sudden foreign policy surprises hitting markets.

The green and healthcare agendas

Biden wants to pursue a strong green agenda, which spells risks for the energy and motor industries but opportunities for other areas such as renewables, infrastructure and technology.

Biden is also eying drug pricing. This is a perennial issue during US elections, but one intensified this time around as the Covid-19 crisis has highlighted inequalities in the healthcare system. His election is potentially bad news for some pharmaceutical stocks and healthcare insurers, but some of this risk is already priced in and, in any case, he may face a significant battle to get any proposed legislation enacted.

A Biden Presidency may also be more cautious towards countering the virus, making more controls a possibility that will be damaging to jobs and the broader economy whilst in place.

What does it mean for markets?

Overall, a scenario in which Biden wins but the Republicans keep the Senate may be somewhat beneficial to share markets as major tax changes would be unlikely, but Biden would still be able to change foreign policy and regulation. However, it is hard to gauge to what extent different scenarios are already priced into markets currently and how they might react as events unfold. Presently, the polls paint a more optimistic picture for Biden than betting markets, which indicate the race is very close.

Ultimately, the extent Central Bank support for markets is probably a more important factor than the Presidential election, but it does add to investor worry and might be a reason for some to take profits from what has so far been an extraordinary stock market rally since the lows in March. It may take more Fed money creation and market intervention to take US shares to materially higher levels.

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